What to Do With a Windfall of Cash?

by Alasdair Smith

A cash windfall should be wisely invested for long-term benefit

Almost everyone has dreamed of a windfall of cash at some point. The thought of unexpected cash makes us think of the fun we could have spending it on luxuries like a new car or exotic vacation. But before you start searching for that idyllic island hideaway, there are some essential considerations for unexpected windfalls that may not be fun but that will pay rich dividends in the long term.

Expensive Debt

Before anything else, get rid of any expensive debt such as that held on credit cards or store cards. It makes no sense to have cash at hand while you accrue interest on any outstanding balances you may have on your cards. The only exception to this rule is where you have cards with a zero percent interest deal; but be careful because these offers are often time-bound and you should ensure that you settle any outstanding amounts before interest is applied after any introductory period.

Mortgage Debt

If you have anything left after paying off your credit cards, tackle your mortgage if you have one. The interest rate may seem a good value when compared with the levels charged on credit cards, but remember that this interest accumulates over a far higher amount and over a longer time. Paying off some or all of your mortgage with your windfall can save you thousands of dollars in interest charges. With a mortgage likely to be your single biggest outlay, paying this off early releases your regular earnings for other more enjoyable purposes too. The only major consideration is if your mortgage has early-repayment penalties. In such cases, however, it might still make financial sense to pay any penalty and settle your mortgage, but do the calculations and seek professional advice if you have any doubts.

Start Saving

With your credit cards clear and your mortgage paid off, look at your savings levels and ensure that you have enough cash set aside to cover any household, business and living expenses for a minimum of three months, more if possible. Anything might happen in the future and this financial cushion can keep you going if things get really tough -- if you are laid off work, for instance.

Invest in Your Future

If you have anything left then, the smart thing to do is invest in your own future through tax-efficient long-term investments such as a retirement plan. These, however, can be a complex area to understand; if you don't already have a plan in place it is worth consulting a financial professional for advice.

Treat Yourself

If there's anything left after doing all the sensible things, then it's reasonable to give yourself or your family a little treat. A weekend away in a nice hotel, or a fine meal to celebrate your good fortune is an appropriate way to mark your financial diligence. But no matter how enjoyable, don't begin to think of these treats as the norm or you may find your debt growing without the possibility of a second cash windfall to bail you out.